Colombia - Economic Briefing January 2003

Government Makes Progress on Economic Plan and Towards IMF Endorsement (cont.)

Central Bank overshoots inflation target and monetary policy path maintained
In December, consumer prices rose 0.26%. The December figure brought down the annual inflation rate from 7.1% in November to 7.0% in December, well above the Central Bank’s 6.0% target for 2002. The 20.0% nominal depreciation of the exchange rate to the US$ was one of the key drivers behind the higher than expected inflation in 2002. Producer prices rose 9.2% in 2002, a significant acceleration from 6.9% in 2001 and an indication that inflationary pressures remain present. Nevertheless, last year represented the fourth consecutive year of single digit inflation and the Central Bank is confident in meeting its 5% to 6% target range set for 2003. This year’s inflationary setting will be determined largely by the impact on domestic prices of the new tax increases and any resurgence of pressures on the exchange rate. If the rising trend in inflation persists, the room for further monetary easing will diminish. In December, the Central Bank eased the monetary reins further by lowering the benchmark DTF interest rate by 0.21 percentage points to its lowest level in 2002 and the lowest threshold observed since the inception of the rate in 1982. Last year, the Central Bank lowered interest rates a total 381 basis points and the financial system enjoyed substantial liquidity as a result of the expansionary monetary policy. If significant inflationary pressures remain absent, monetary authorities may be able to sustain the current interest rate environment. However, participants anticipate that the pick up in economic activity is likely to force the Central Bank to raise interest rates throughout 2003, with the DTF rate rising to 10.0% by year-end, unchanged from last month.

Participants see the rising inflation trend to moderate throughout this year, with the rate decelerating to 6.1%, which is up a 0.3 percentage points from last month. This month’s figure is on the higher end of monetary official’s inflation target for this year.

Current account deficit widens amid faltering export sector
In the third quarter of last year the current account deficit reached to US$ 493.3 million. The current account deficit was above the second quarter number of US$ 444.8 million and also significantly exceeded the figure observed in the same quarter last year in 2001 (US$ 133.4 million). As a result, the annual current account deficit rose from US$ 1.1 billion in the second quarter to US$ 1.5 billion in the third. The worsening in the current account deficit was mainly due to the reversion of the trade balance from a surplus to a deficit. The trade balance incurred a deficit, as exports experienced a sharp decline of 7.2% over the same quarter in 2001, while imports grew at a 2.5% pace. Exports suffered from a decline in sales of traditional exports, particularly oil (-18.1% year-on-year) and coal (-18.1% yoy). Non-traditional exports also experienced a notable contraction of 6.7% yoy. The increase of imports was most pronounced in consumer goods, which added 8.5%. Intermediate goods grew at a more moderate pace (+3.6% yoy), while capital goods declined 2.6%.

A US$ 16.4 million deficit in the capital account balance for the third quarter added to a worsening in the overall balance of payments. The third quarter figure was considerably below the US$ 414.7 million surplus recorded in the preceding quarter and in the same quarter last year (US$ 375.7 million). The US$ 195.3 million of long-term financial outflows was only partially compensated for by US$ 179.0 million in short-term financial inflows. As a result, international reserves declined US$ 245.6 million in the third quarter, according to balance of payments data.

Consensus Forecast participants see the annual current account deficit to have widened further in the final quarter of the year, with the annual figure reaching US$ 1.8 billion, which is virtually unchanged over last month’ forecast. The less than propitious setting for the global economy and improved prospects for a pick up in domestic demand is likely to keep the trade balance from improving significantly this year. As a result, the current account deficit is likely to decline only moderately to US$ 1.7 billion in 2003.